Boom to Bust in Real Estate
The California market (for example) in most areas is now driven by speculation and low interest rates, the same speculation that we saw back in the 80's but the speculative market did collapse when banks moved to stem rising inflation and interest rates
The California market (for example) in most areas is now driven by speculation and low interest rates, the same speculation that we saw back in the 80's but the speculative market did collapse when banks moved to stem rising inflation and interest rates jumped into the mid-teens.
Do keep in mind that this all started with demand as renters were jumping on board of home ownership with the low interest rates but most obtaining variable interest type mortgages and many with excessive prepays. As interest rates continue to climb, you will see a climb in foreclosures also. Any time you are dealing with a market where landlords are struggling to find tenants, high vacancy rates but a strong sellers market such as Sacramento with people who are buying second and third properties while rates are low, with the goal of earning part of the mortgage income because they are speculating that home values will continue to rise are not real estate investors but investing on the speculation of hitting the big one will face great looses as a whole.
We saw this same form of investing during the dotcom boom in semi valley but most are now holding properties over mortgaged and producing a loss every month.
Some will profit in this market but most will not and I find this to be a dangerous way to invest - if you can afford to loose 10's of thousands of dollars play the game of Russian roulette with your credit, your savings and your retirement.
For one to speculate, as a strategy for real estate investing will find them selves just like those who invested in the stock market and lost life savings in the late 90's and early 02's in the stock market.
You can still make moderate profits in bubble markets but you must work twice as hard as the average investor and you must be willing to do what you competition is not willing to do!
You must seek out motivated sellers by:
- Direct mail campaigns to homeowners
- Research out various forms of notices of defaults prior to the legal publication
- Be willing to do door to door marketing campaigns
- Seeking out areas that have a large number of foreclosures and canvas the area
True real estate investors do not base an investment on speculation alone but:
- They calculate the value of an investment
- They buy below its value
- They understand the market
Buying a property based upon the speculating method is simply making a purchase at any price and hoping that another will purchase it at a higher price from you.
True investing is hard work, performing due diligence by way of research on the property, running the numbers on profitability and using the "What if factor".
The "What if factor" is the simple process of "If I can't sell it for profit what do I do?"
- Can I rent it for profit?
- Can I owner finance or lease option for profit?
- Can I use the equity for indirect profit?
- Can I trade it for profit?
When bubbles begin or does burst rents fall, vacancies rise, the market gets flooded with properties, properties decline in value but the expenses rise such as taxes, utility cost, upkeep cost, insurance and association fees known as your holding cost.
A simple purchase strategy is to never pay more than 80% of true market value and you can avoid speculating with your credit, your savings and your retirement.
"Think small and act small, and we'll get bigger. Think big and act big, and we'll get smaller."
By Herb Kelleher, Southwest Airlines Founder, Chairman
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